OffShore Funds Advantages and Disadvantages

SurreyRoger

With the Interest rate on Fixed rate bonds continuing to be so feeble I was considering investing the money from my maturing Fixed rate bonds splitting into into small amounts into 3 or 4 funds .Two of these are Hermes Global emerging Markets and Lindsall Train Japanese Equity. However it appears they are both OffShore funds. (I believe not all Global Emerging Markets and Japenese funds are not OffShores funds) The other possibilities in am considering are UK funds.What are the advantages and disadvantages in investing in offshore funds. I am standard rate tax payer and have used my ISA allowance for this year..Any feedback on this subject. This is general question and I am not asking for advise whether the above funds are a good investment.

bowlhead99

The advantage for the fund manager of using a fund domiciled in an 'offshore' location is that it it can allow more efficient broader participation from investors who are themselves resident all over the world ; and it may minimise tax withheld by the investee countries before the investment proceeds get back to the fund.

For example, there may be quirks of international tax treaties which mean that if an investor from Argentina wants to put his money into a fund based in the UK he suffers more tax than if he puts his money into a fund based in Luxembourg making the exact same returns. Or it may be that due to some tax treaty, a company in Vietnam can pay dividends to an Irish fund without withholding any tax at source, while if it was paying them to a UK fund they would withhold tax along the way.

Both of those are made up examples, but you generally find that a lot of non-UK funds which are regulated and allowed to be marketed across the EU tend to be domiciled in either Luxembourg or Ireland as those countries have a strong position in the market for administering and operating investment funds.

For you as an investor, the 'advantage' of considering investing in offshore funds is that you have more choice. If you are willing to invest in a fund domiciled in Ireland, you can invest in Lindsell Train Japanese Equity which is tax resident in Dublin - and if you are not, you can't, simple as that.

The fund is still regulated in the same way as a UK resident fund would be regulated, because funds allowed to be promoted to retail investors are subject to common standards across the EU so that they can be 'passported' and offered to investors from all the other countries.

The potential 'disadvantage' of investing your money through a non-UK fund company such as Lindsell Train Global Funds plc in Ireland is that unless the fund applies for clearance from HMRC as a 'reporting fund', your investment in it will be subject to the UK's anti- tax avoidance rules.

Basically these say that if you stick your money in an offshore fund and that fund invests in loads of companies and makes some income and gains each year, and internally reinvests it, and then you cash out several years later... your total return might be a mix of income and gains and HMRC won't know what the mix is so they will err on the side of caution and make you pay tax at income tax rates on the gain that you get. Generally income tax rates are higher than capital gains tax rates.

The way to stop that happening is for the fund to register with HMRC as a reporting fund under their offshore funds regime, basically confirming that it will pay out all the income it receives as dividends and if it doesn't pay out all the income it will at least make the information available to investors so they know how much dividend income they were allocated even if it was internally reinvested.

In that way, HMRC know you are either receiving the dividend income each year as you go along, or you are being given the information to declare the income each year as you go along. So they don't have this risk of you just putting your money into a big opaque black box and getting a big profit back at the end 'pretending' it's a gain from the share price rise while really a lot of it was just dividend income which 'hid' inside the box. Once that risk is taken away, they allow you to treat your income and gains from the offshore reporting fund just the same as you would treat returns from an onshore UK resident fund.

What this boils down to is that if you are weighing up investment options and those options include non-UK resident funds, check whether the fund has 'UK reporting fund' status. For example on LT's homepage for the Japanese Equity fund, the headline features are:

Dublin domiciled UCITS fund
Available in the UK
UK reporting status
Daily valuation and dealing
Range of share classes
Concentrated portfolio with low turnover

A Dublin based UCITS fund is subject to the same regulation as a London based UCITS fund and as you know it's 'UK Reporting' you don't need to worry about any 'funny' tax effects from it being offshore.

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A much more obvious point for me to raise is the fact that although a lot of people are frustrated with the prospective returns on fixed rate cash deposits or bonds, moving instead to a fund that invests in a concentrated portfolio of Japanese equities, or a big bag of companies based in emerging markets, is quite a step up the risk scale. With only 3 or 4 highly specialist funds like the ones you mentioned, you can't really diversify across all the world markets, and it would be possible for either of the funds you mentioned to drop in value 50-60% over the course of a year or two.

If all you are doing is putting maturing cash or investments into such funds, rather than all your money, then that can be fine. But going from a cash deposit to a fund invested 100% in equities - without stopping at any option in between - seems a bit extreme

But you did say you didn't want advice on fund choice so I should go easy on you.
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The major deal with offshore investing (if you're doing it outside an ISA or pension) is tax and making sure to look for that 'reporting fund status'. My Mum is in Lindsell Train Global Equity and would probably be surprised to know it's an 'offshore fund', fearing her name will come up as a terrorist money launderer in the next round of the 'Paradise Papers'... but for day to day practical purposes it's just like being invested in a UK OEIC.

There are minor differences with the various overseas equivalents of the FSCS (Ireland gives lower coverage on a UCITS than UK does) but in practice the likelihood of you having recourse to such scheme is remote, without large scale fraud by the investment manager.

LongLostFriends

The above post is very helpful. There does seem to be a number of Offshores funds domiciled in Luxembourg, Is there a reason for this. Where do I find where a fund is domiciled and whether it has a UK reporting status. I cannot find the fund mentioned earlier, Hermes Global Emerging Markets. Is this an offshore fund and in which country Is it registered for tax purposes?. Thank you

Malthusian

LongLostFriends wrote: »

The above post is very helpful. There does seem to be a number of Offshores funds domiciled in Luxembourg, Is there a reason for this.

Developed market, low tax environment (so investors know they won't be charged taxes in the fund's domicile on top of the taxes they'll be charged in their own country), good regulation.

Where do I find where a fund is domiciled and whether it has a UK reporting status.

Look it up on Morningstar and look under "Management". The ISIN code will also usually tell you. Hermes' ISIN begins with an IE for Ireland.

The list of funds with reporting status is on HMRC's website.

ThirdThoughts

Where do I find a list of the ISIN codes. What is the one for Luxembuorg please. Are offshore funds in any specific country that should be avoided.thank you

jimjames

SurreyRoger wrote: »

With the Interest rate on Fixed rate bonds continuing to be so feeble I was considering investing the money from my maturing Fixed rate bonds splitting into into small amounts into 3 or 4 funds .Two of these are Hermes Global emerging Markets and Lindsall Train Japanese Equity. .

Just a point to note, if you're switching from cash savings to funds like that you really are jumping from one end of the risk scale to another. You may well be aware but if you're not considering how risky some investments could be then you may want to review the level of risk that you're comfortable with.

EdSwippet

ThirdThoughts wrote: »

Where do I find a list of the ISIN codes. What is the one for Luxembuorg please.

https://www.isin.net/country-codes/